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Studying for a test? Prepare with these 5 lessons on Investment vehicles, insurance, and retirement.
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If you wanted to build or produce most anything, I want to think a little bit about what you would need to do it. I have some pictures here, just to get our imagination going. These guys are up to making something with iron or maybe making iron bars, or making some type of thing out of iron. Right here is an old picture of some planes being made in a factory. Let's just think, in very general terms, of things you need to produce anything. First of all, you're going to need some land. That's definitely true if you're running a farm, or if you're trying to produce timber. You definitely need land even if you have a factory. Obviously, both of these factories are sitting on top of some land. Then, you're going to need a building, maybe. Most probably a building. You're going to need some tools and equipment. Tools and equipment. Then, you might need some raw material. In this case it might be iron. Over here too, you would need some metal. You might need some electricity or some oil to keep the production lines going. You're going to need some raw materials. Raw materials. Then, you're going to need people to actually work in your factory. These guys putting these hot bars of iron inside of whatever this thing right over here is, or the people working on the factory line. You don't see any here. This must be off time. You need people to actually work on the factory line, to tighten bolts and all the rest of things. You're going to need labor. If you put all of these things together ... Let me put them all together. If you put all of these things together then you should be able to produce your product. You'll be able to output whatever you set yourself to do. In the classical sense, when you think about all of these different things that you might put into production, sometimes they're referred to as the factors of production, they separate out ... This is in the classical sense. They separate out building and the tools and equipment as one of the classes. You have land. You have labor and you have buildings. Sometimes, just to throw it in there, sometimes you'll throw in management or organization in here. Someone needs to figure out how to layout all of this type of thing. This could also be a factor of production. Buildings and tools and equipment, they're kind of separated out from everything else. In the classical sense, they're referred to as capital. They are referred to as capital. They kind of have this separate distinction, because these are things that are made by human beings for the specific purpose of producing other things. Obviously, there are other things that are made by human beings. For example, you could have a ... Let me think of something that's nicely ... A hat. A hat is clearly made by a human being, but it's not produced to produce other things. It's meant for fashion. It's meant to kind of improve someone's quality of life. It's not made to make other things. In this case, the building and the tools, the whole reason why they were made is to make other things. In the classical sense, they are referred to as capital. If we go to kind of more modern times, you'll hear words like "human capital" or "financial capital." You'll see a lot of different types of capital that people try to talk about. Human capital or financial capital, so what are they talking about? In the classical sense, capital were things that people made so that those things can help us make other things. The analogy is, is human capital isn't just straight up labor. It plays a role in it. In modern times, when people talk about human capital, they're trying to make the same analogy. They're kind of investments made in humans, so that those humans are better at producing other things. Human capital, when people refer to it, they are things like education, skills, talents that someone might have, talents, experience that someone might have inside of them or that were invested in them, (if you think about the situation of education) that make them more productive. They're things that are thrown into a human being that make them able to produce more output. This is what people refer to as "human capital" and how it's different than just straight up labor. Labor is just ... Look, any human being can go there and move something from one place to another or pick something up and put it on a shelf, or take it off of a shelf and put it on another shelf. What human capital is, are the investments in that person that make them more productive, more skilled, more able to do more interesting things. The same thing is true (just to throw it in there, just so you can kind of see this analogy) is financial capital. You could just say, "Look, there's something …" There's money for money's sake that you could use to buy a hat, or that you could use to buy really almost any of these other things. When people talk about financial capital they're talking about money that's being used for the purpose of producing more output. You could view it as the money that you actually need to run a factory. For example, they'll call it working capital. It's the money in the cash register, so that you can actually run your store or run your restaurant. Or, it could be money that's put to work by buying ... Kind of traditional capital, for buying these capital goods, so that you can produce more output. The whole idea here, I just want to introduce you to the idea of capital. It's central to the word capitalism in it's classical sense and then maybe in the more modern sense. Especially when people talk about something like human capital.